A place to exercise ideas before writing about them with greater discipline.

Sunday, August 2, 2009

The "Real Recovery" Question

In spite of the temptations to expend my personal time and cognitive effort on online trading, I continue to leave my portfolios in the hands of an individual whose judgment I trust more than my own. I feel that the best I can do is monitor what is happening on a monthly basis; and, if any questions arise during my monitoring, I raise them with my personal broker. The monitoring takes place when I receive my monthly statement, which I download as a PDF file from the Web page for my accounts.

My electronic mail notification that my monthly statement was ready appeared in my morning Inbox. After many dismal months it was nice to see some numbers that were a bit more positive; but, born worrier that I am, I found myself wondering if some of those double-digit gain percentages were a little too positive. Comparing recent performance against current prices helped by reminding me that my overall losses were still far from being recovered; but had the markets actually embarked on a "rush to recovery?"

I continue to live by the basic law of investing, which is that anything too good to be true probably isn't. Therefore, I took some comfort in reading Jamie Robertson's monthly market report this morning on the BBC NEWS Web site. The best way to consider your own monthly review is to compare it with at least one other! This month Robertson introduced the report with the title "Is real recovery on its way?;" and that was incentive enough for me to read further.

As almost always seems to be the case, the report was front-loaded with metaphors, most of which have been used too many times. First we got the medical:

The company earning season has rebuffed the pessimists and while not flat on its back, the corporate patient is at least sitting up, managing a smile or two and taking light fluids.

Then we got the lemmings:

The problem is that we may be mistaking the bottom for a recovery. Just because the economy is no longer falling off a cliff does not mean that we are leaping, climbing or even crawling back up it.

Indeed, there was a fair amount of "insider talk" to deal with before I could get at the material that interested me the most, an attempt to translate the artefactual numbers of analysis into some educated guesses about the "real economy." Getting past the metaphor Robertson hauled out for this portion of his report ("Really motoring?"), I found some interesting observations:

Heartening stories of bankers making shed loads of money do not reflect what's going on in the "real economy".

Almost without exception banks' said bad loans were on the increase.

If the recovery doesn't start to motor, those bad loans are only going to get worse.

But there is some evidence that the "real economy" is turning the corner.

Much of it is down to restocking of inventories.

Last year, companies savagely cut back on stocks, and only recently have they started to refill the shelves.

Others have been boxing clever. Hyundai has made the most of tax cuts and incentives in its domestic markets, and in the US has offered new buyers low fuel prices for new Hyundai vehicles at $1.49 a gallon for a year.

Hyundai pays for any balance between $1.49 and market prices. Hyundai profits hit record levels.

Apple profits also soared: it sold more than 5.2 million iPhones in the quarter, more than seven times what it sold in the 2008 quarter, much of the interest generated by the new iPhone.

Meanwhile Microsoft saw sales fall for the first time in over 30 years.

The consumer hasn't disappeared altogether, but he and she are being awfully canny with their cash.

So Robertson's "evidence" basically came from two companies. One was concerned with the manufacturing of a durable good, the automobile; and what Robertson described as "boxing clever" had less to do with the manufacturing itself (and therefore its impact on employment) and more to do with a marketing strategy, whose economic impact depends heavily on what will happen to the price of gasoline over the next year. However, the Apple example is even more confusing. Regardless of whether or not an iPhone counts as a "durable good" (I would assume that it does not), it would be interesting to see how much of Apple's profits came from the device itself and how much came from the software people are buying for that device. My guess is that most of the money comes from the device, but I am curious as to whether there has been any change in the percentage of the profits due to the software.

The reason for my curiosity is that, for all the propaganda we may hear about how the United States has moved from a manufacturing economy to a service economy (or, worse yet, a "knowledge economy"), talk about the "real economy" always seems to fall back on manufacturing. This is true not only for analysts like Robertson but also for the folks who phone in to the morning broadcast of Washington Journal on C-SPAN (which I usually follow on my XM radio, rather than my television) whenever the economy is the focus of the discussion. (This morning was a particularly interesting case in point. The "open mike" on the state of the economy followed a segment on health care reform; and it was telling how many of the callers linked the question of economic well-being to the problem of affordable health care.)

This raises another percentage question. What is the percentage of jobs lost in the manufacturing sector, and what is the percentage in the service sector? (I have my doubts as to whether or not the "knowledge sector," if it really exists, figures in the statistics that are gathered, at least in any significant way. This, in itself, would say something about the extent to which some of our economic planners and forecasters may be trying to sustain themselves with nourishment from "Jonestown Kool-Aid.") If those in the manufacturing sector have been hit the hardest and if we face a future in which the sector itself will continue to implode, what will happen to those for whom that sector was their life's work? The "Report on the First 100 Days" from our Department of Labor gives some signs that this division of the Obama Administration recognizes the importance of this question; but it remains to be seen if the question will receive anything more than self-gratifying lip service.